Financing Ethiopia’s Railways with China and Turkey

By Yunnan Chen

Following the impacts of the global COVID-19 pandemic, the role of debt finance—and China’s particular role in becoming the largest bilateral creditor to the developing world—has come to the fore as many developing countries, particularly in Africa, face crises on multiple fronts. Indeed, governments must now navigate an economic recession, a debt crisis, and the need to mitigate the health impacts of the pandemic all at once and will likely need to borrow money to afford it.

A new working paper with research collected from 2018-2019 in Ethiopia explores how the oft-called ‘African Developmental State’ has leveraged not only Chinese loans (Ethiopia is the second largest borrower from China in Africa), but also infrastructure finance from other emerging powers such as Turkey, to pursue grand ambitions for the industrial development of the country. The paper relates the case of Ethiopia’s Chinese-financed railway projects, including the Addis-Djibouti Railway, contrasting it to Ethiopia’s experience with subsequent European/Turkish financed projects.

These railway case studies illustrate the complexities and challenges of working with international partners, absorbing foreign technology and implementing a new infrastructure system from the ground-up. They also illuminate the distinctiveness of Chinese development finance, which brings with it a coordinated package of loans, hardware and training programs.

The political nature of the bilateral relationship has been a boon to Ethiopia’s government in the financing terms and loan repayment, which highlights the challenges of the current emerging debt crisis and suggests how China might respond to it.

Strategic Bilateral Relationships Have Their Advantages…

The Addis-Djibouti Railway was many firsts: the first electrified railway, the first cross-border African railway since the Tan-Zam railway in the 1970s. It was constructed through a $2.5 billion loan from Export Import Bank of China, with two Chinese state-owned enterprise, China Railway Engineering Corporation (CREC) and China Civil Engineering Construction Corporation (CCECC), constructing, and subsequently, operating the line since it began operations in 2018.

Following this, a Turkish firm, Yapi Merkezi, has just finished construction in 2020 of a second branch of the network from Awash to Weldiya (a.k.a Hara Gebeya), with a consortium of financiers from Turkish Eximbank, Credit Suisse and several other European export credit agencies. Both railways are constructed according to the ‘standard gauge’ model also propagated by Chinese firms in Kenya, Nigeria and Southeast Asia.

Figure 1: Map of Railway Projects in Ethiopia

Source: Skyscraper City.

Due to the different nature of financing, the two projects exhibit distinct differences in the relations between host government agencies and the contractors. While the relationship with contractors in the Turkish project was more commercial and transactional in nature, the relationship with Chinese contractors was premised on the political nature of the project, which has been enfolded into China’s wider Belt and Road Initiative.

Ethiopia’s strategic bilateral relationship with China has had its advantages: it was able to suspend loan repayments on the project in 2017-2018 when the government faced shortages on foreign exchange—even as it had to continue paying its European creditors, who would be less forgiving. The Ethiopian government also owed payments to the SOE contractors on the operations and maintenance contract, but who, because of the political nature of the project, still fulfilled their contracts anyway. In 2018, China and Ethiopia eventually negotiated and agreed to a restructuring of the loan terms, extending the repayment period from 10 to 20 years. This was a significant financial concession, and one that led to substantial losses for Sinosure, the export credit agency that insured the loan, who publicly acknowledged deep problems in the due diligence of the project, and signals a wider reflection within China’s approach to infrastructure investment and planning.

… And Their Disadvantages in Negotiating with Contractors

However, while this flexibility offered by the political relationship has been an advantage, the flipside has been that the Ethiopian railway agencies have had a harder time in negotiating with the contractors. For example, in one case, the railway agencies turned to the Chinese embassy’s commercial office to pressure the contractors to pay for certain equipment and parts. As a condition of the financing, they were also required to use a Chinese company as the employer’s representative, which contributed to some mistrust that this representative was colluding, or covering, for the contractors.

This contractor relationship also has implications for training and technology transfer. Notably, with the Turkish contractors, the Ethiopian Railway Corporation (ERC) had more success in getting the firm to engage in technology transfer in the construction stages of the project for the Awash-Weldiya line, training ERC staff and directly building institutional capacity. Overseas Chinese railway projects have been distinct for the package of knowledge-transfer and capacity building, in the form of scholarship exchanges and vocational centers to train local staff to operate the railway; however, technology-transfer during the construction phase was negligible, in contrast to the Turkish project. The Chinese partners have also struggled more with training local staff due to the language barrier, complicating the prospect of an eventual project handover.

The Big Picture

These challenges matter: the ability of host governments to gain knowledge from foreign partners is crucial to the long-term project sustainability, its country ownership, and more broadly, to the capacity of a developmental state such as Ethiopia.

Even before the outbreak of COVID-19, the Ethiopian railway project faced a multitude of operational, technical and social challenges. The crisis puts a nail in the coffin for future railway finance, as the exuberance of finance that built rail projects in Africa and Asia diminishes. Meanwhile, China’s financial institutions have shown greater recognition of the importance of debt sustainability, but also less appetite for risk in Belt and Road financing.

For Ethiopia, the global pandemic compounded with its civil conflict in the last year, will be additional obstacles to make the railway work for development and the country’s economic transformation.